July 24, 2002

Socially Conscious Funds Seen Poised to Grow

July 23, 2002 -- Mutual funds that aim to promote environmental or social goals have not seen their assets increase much lately.

But growth in coming years will be spurred as more companies offer the products in retirement plans, industry executives and others say. Recent corporate scandals have also made socially responsible funds more attractive to investors, observers say, by demonstrating the need to look beyond financial results in evaluating a company.

According to the Social Investment Forum Foundation, a trade association, the number of U.S. funds that incorporate social screens in their investment process rose to 230 from 168 between 1999 and last year. But assets in this category of funds inched up only $1 billion to $154 billion in that period, largely because of the stock market's decline, the organization said in a report last year.

Socially conscious mutual funds now account for 2% of total fund assets but could make up 10% by 2012, said Barbara Krumsiek, chief executive officer of the Calvert Group, whose funds invest along socially responsible lines.

The increase will be driven primarily by the greater availability of these funds in 401(k) plans, which in turn will lead more people to put money into them, Krumsiek said.

The number of plans offered by large mutual fund companies like Fidelity that provide at least one socially screened fund as an option has risen from one in 10 to nine in 10 in the past few years, according to Krumsiek.

Until about four years ago, plan sponsors were reluctant to offer socially conscious funds, she said, because of concerns about their performance and worries about potential legal liability if the products were seen as investing in too narrow a range of companies. Both objections have since been overcome, however, she said.

Thomas Grant, president of Pax World Funds, which also incorporates social values into its investment decisions, agreed with the projected growth rate cited by Krumsiek. "I don't know anything that's attracting more assets, other than hedge funds, right now," he said.

Sophia Collier, chairman and president of Citizens Funds, another socially responsible complex, feels assets held in these type of products are likely to climb to 15% of all fund assets within ten years.

Executives said investors' concerns about corporate accounting and governance have made socially conscious funds more attractive because, in addition to analyzing a company's financial fundamentals, they take management's behavior into account.

"Our research is not just crunching numbers," said Grant. "We tend to delve into companies' characteristics a bit more deeply."

Collier expressed similar sentiments. "People now realize that examining companies from both an ethical and a qualitative standard is critical," she said.

Because they look at management's behavior, socially conscious funds have a better chance to spot bad apples than other mutual funds, executives interviewed maintained.

For example, Collier said Citizens, which oversees $1 billion in seven funds, had declined to invest in Enron Corp. before its accounting irregularities were disclosed, because the company had demonstrated a "pattern of environmental violations." Citizens reasoned that a company that tolerated these probably had no controls in place to "prevent, basically, illegal activity," she said.

Steven Schueth, a spokesman for the Social Investment Forum Foundation, noted that although asset growth in socially responsible mutual funds has been flat recently, assets in all professionally managed socially screened portfolios increased 8% to $2.34 billion last year from $2.16 billion in 1999. These portfolios include separate accounts managed for institutions and wealthy investors.

Schueth said he believed that because of the "crisis in confidence" in corporate bookkeeping, more people will turn to socially screened investment products because they "take a harder look at these companies" and at "the quality of company management."

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